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Report: LNG demand to grow 6% but market remains unpredictable
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CONSULTANCY Wood Mackenzie expects LNG demand to continue growing this year, but has warned that this number will need to be revised as the effects of the coronavirus (COVID-19) pandemic become clearer.
In its latest short-term gas and LNG outlook report, released this week, Wood Mackenzie noted that a combination of COVID-19, sus- tained low oil prices and LNG oversupply posed risks for the global gas sector over the course of this year.
“While the collapse of LNG prices towards US production break-evens was foreseeable, the narrative for the rest of 2020 could not be more unpredictable,” Wood Mackenzie research direc- tor, Robert Sims, said in a statement.
“An already oversupplied LNG market comes out of a mild winter with high inventories across Europe and Asia, only to face a global pandemic which has already destroyed gas demand across China and looks increasingly set to do the same across the Asia-Pacific and Europe,” he continued.
The consultancy forecasts that LNG demand will rise to 371mn tonnes in 2020, up 6% year on year . However, Sims noted that the numbers would require “constant revision” as the pan- demic hits economies around the world.
China, where COVID-19 originated, was the first to implement a lockdown in an attempt to contain the outbreak. This had a significant impact on its natural gas demand as travel was restricted, industrial activity slowed and Chinese companies issued force majeure notices to sellers of LNG. Assuming economic activity continues to ramp up from this point, Wood Mackenzie projects that Chinese gas demand will fall by 6-14bn cubic metres over the course of the whole year. However, this would still translate into gas demand growth of 4-6% in 2020, the consul- tancy added, also forecasting that China’s LNG
demand would reach 65mn tonnes this year, up 6.6% y/y.
This comes as China introduces meas- ures encouraging businesses affected by the lockdown to resume operations, including a reduction in gas prices for non-residential users. However, Wood Mackenzie believes that these are “insufficient to stir lost-de- mand recovery and new coal-to-gas switching programmes”.
As China starts up, however, a number of lockdowns are in place across Europe, and more could be brought in if the crisis worsens. Wood Mackenzie warned that such lockdowns pose risks of “severe” disruptions to global supply chains.
Even if oil prices can be corrected, how- ever, the consultancy believes that the fun- damentals behind the global glut of LNG remain unchanged, with strong production growth, weak Northeast Asian demand and an increasingly saturated European gas market all contributing.
“Prospects of any quick recovery in the latter two have been dealt a blow by the impending economic downturn many are predicting this year, leaving the only likely balancing item left – a turn down of US Gulf Coast production,” Sims said. “We forecast 0.5bn cubic feet [14mn cubic metres] per day of production will be lost through Q2-Q3, but there is risk that this num- ber may prove too conservative if demand drops further.”
If low oil prices are sustained, this could make oil-indexed LNG contracts – such as those his- torically used by Japanese and South Korean buyers – cheaper. At the same time, low crude prices threaten to take associated gas produc- tion in the US’ Permian Basin offline, though the impact of this will not be felt immediately, but more likely next year.™
Even if oil prices can be corrected, however, the consultancy believes that the fundamentals behind the global glut of LNG remain unchanged.
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